Call us atAn annuity is a contract with a life insurance company that is funded by the purchaser. An annuity is a flexible savings vehicle that can protect the purchaser from the risk of living a very long time. There are several types of annuities and they come with a variety of options and features that make the purchase of an annuity a complicated process.
The types of annuities discussed in this section are all of the fixed variety. Of those there are three basic fixed annuities: immediate, fixed, and fixed indexed. All fixed annuities are tax deferred. Immediate annuities provide an immediate income stream, while fixed and fixed indexed annuities are designed for longer term accumulation. Some annuities offer a guaranteed rate of interest, while others do not.
An immediate annuity is a fixed annuity that will provide the purchaser an immediate monthly income stream for a specified length of time. The amount of the income stream is dependent on the needs of the client and the amount funded into the annuity. In most cases, the implementation of an immediate annuity is an irrevocable decision. The payments will continue weather the purchased lives or dies. Upon death, the remaining payments will go to the purchaser’s estate or beneficiaries. The rate of interest in an immediate annuity is calculated into the total amount funded into the annuity and amortized over the specified number of payments.
A fixed annuity, also called a simple interest fixed annuity, is one that guarantees a specific rate of interest for a certain time period. At the end of that time period, the annuity may be renewed and a new rate of interest and time period is declared by the insurance company.
A fixed indexed annuity is an annuity that follows certain market indexes while not being directly in the market. This annuity offers a potential higher rate of interest while following certain indexes without the risk or volatility. There is no risk to the purchaser’s principal or interest gains. The insurance company bears the risks. The purchaser receives asset protection from market losses while giving additional potential upside from market index gains. Most fixed indexed annuities offer many additional options and enhancements that can be added or purchased. A life time income rider can be purchased for an additional annual fee. Death benefit enhancement riders can also be added to your fixed indexed annuity. These riders provide guaranteed interest growth separate from the indexing. The rider should not be considered part of the cash account. The rider account is a separate account within the annuity product.
In addition, some fixed indexed annuity products offer bonus features. A bonus is an amount the insurance offers to offset the cost of moving funds from one type of savings vehicle to the annuity. Often, the bonus has a vesting schedule over a number of years. Most annuities also have surrender charges that are assessed during the early years of the contract if the annuity is surrendered. Withdrawals are taxed as ordinary income. Other restrictions may apply. A consultation with us is necessary to determine the applicability of an annuity in your portfolio.